There has been much discussion recently regarding what appears to be a surge in sugar consumption in Asia, particularly in China and Indonesia, accompanied by a corresponding surge in raw imports.
Compared to earlier this year, analysts have marked up their estimates for combined Chinese and Indonesian raw sugar imports by as much 1.5 million-2.0 million mt, and even that may not be enough. Sugar statisticians consider 2-3% as a normal annual rate of growth in sugar consumption; this compares to Chinese mills sales that are so far this crop year up 29% year-on- year. Has consumption growth really gone off the scale or is something else going on here?
Part of the rise is due to a genuine increase in the amount of sugar that Asians are eating (and drinking). Asian economies are growing rapidly, particularly Indonesia’s, and this increasing wealth is flowing down to the general population. In addition, with the exception of China, Asia is getting younger; young people go out more, eat more processed foods and drink more sodas. All this contributes to rising consumption.
At the same time, sugar is cheaper than it was a couple of years back. This has a number of key effects. The first is that sugar can win back sweetener market share from fructose in food and drink production. The second is that raw sugar can replace tapioca, wheat and corn in the industrial production of MSG and lysine.
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A few years back this industrial “swing” was estimated at about 500,000 mt for the plants in Indonesia, South Korea, China and Thailand; we would not be surprised if that “swing” was not now considerably more. All this is genuine consumption that should not stop as long as sugar prices stay relatively low.
A third effect of low prices is that the supply pipeline between “mill and mouth” expands. At times of high prices, pipeline participants run down stocks, partly because of the high financial cost of carrying those stocks, partly because people expect prices to fall again. During the past couple of years the pipeline has almost certainly shrunk. It is therefore possible that we, and others, have been underestimating genuine consumption growth, part of which has been fed by an invisible shrinkage in the pipeline. Now the pipeline is being rebuilt.
Unfortunately it is impossible to say what percentage of current mill sales is actually being consumed and what is being stocked in retailers’ and distributors’ warehouses. This is a shame, because although we could expect genuine consumption to continue, the percentage that is going to rebuilding stocks should shut off once the pipeline is full again. That is a danger in both China and Indonesia.
Adding to that danger is that in both those countries the pipeline has been swelled by an expansion in refining capacity. New refineries need working stocks of both raws and whites, and this means a one-off increase in raw import demand.
It is not just the pipeline that is being rebuilt; reserve stocks are also being rebuilt. In China, official reserve stocks have increased to around 6 million mt, and the government announced earlier that it would buy a further 1.2 million mt this crop year. This now looks unlikely, as time is running out, but some traders suggest that the quasi-state companies are also building stocks outside the official public reserve system.
However the important point in China is that both imports and domestic mill sales are strong. This suggests that the sugar is really being absorbed into the domestic supply chains, a mixture of pipeline expansion and genuine consumption. We would argue that domestic prices have held up not because of government support but because sugar is “disappearing” into the domestic market.
The test for China and for the world market will be in the current months when the 1.0 million mt plus of July/August shipments arrive. These are mostly private shipments not destined for reserve stocks. Some of that sugar will have been already hedged on the domestic futures market or presold to domestic users but some probably has not. We will need to see what happens to the Chinese domestic price when the refineries try to sell it on. If the domestic price holds then we will all have to increase our domestic consumption estimates again.
Finally on consumption, some of the increase in Asian domestic sales may be in response to reduced smuggling, either as a result of government action or because of changing import parities. In China we have read about smugglers being arrested and sent to jail while in the Philippines domestic sales have jumped as illicit inflows have slowed. This further complicates what is already a very opaque picture on consumption.